EXCLUSIVE-UPDATE 1-Peru's Merino to push for payment of defaulted bonds

(Adds comments related to Conga project)

* Land bonds a bitter chapter in Peruvian history

* Outstanding bonds worth $1 billion to $3 billion; swap
proposed

* Merino says more to Peru's economy than Conga project

By Terry Wade

LIMA, March 13 Beatriz Merino, arguably
the most respected public figure in Peru, is taking on a new
role as the advocate for holders of the country's infamous land
bonds who want the government to finally pay billions of dollars
in old debts.

Merino, a lawyer by training and Peru's first woman prime
minister, told Reuters in an interview on Tuesday that the time
has come for the executive branch to end a 40-year-old
controversy and take care of a liability estimated at $1 billion
to $3 billion, or nearly 2 percent of gross domestic product, by
paying off the bonds issued to people whose land was seized for
redistribution.

She has considerable political weight and is a rarity in the
Andean country because she is well-regarded by both the left and
the right in a polarized country. Widely seen as both capable
and incorruptible, she was sounded out to lead President Ollanta
Humala's cabinet before he took office in July.

Merino - a former member of Congress who has headed the
country's tax agency, association of pension funds and its
ombudsman's office - said previous governments have created a
"constitutional infraction" by disregarding a 2001 ruling from
the Constitutional Tribunal that told the executive branch to
pay the land bonds. Peru's judiciary has said the bonds are in
default.

Congress did the same last year. Each of the last four
presidents tried periodically to address the issue but balked at
paying up.

"I don't think any state can be in a position to ask its
citizens to uphold the law if it itself doesn't uphold the law,"
she said. "No state can ask people to respect court decisions if
it itself doesn't do so."

Peru's ombudsman's office, which is tasked with making sure
the state respects human rights, has also urged governments to
pay the land bonds since the early 2000s. That was before
Merino, who has at times been talked about as a potential
presidential candidate, took charge of the agency.

"This shouldn't go on any longer and it can't go on any
longer," Merino said.

“Peru today has a respected economy and aspires to be a
first-world country. With that comes responsibilities. And one
of those responsibilities is to honor its debts.”

'CONGA-CENTRIC'

In what became one of the most bitter chapters in Peruvian
history, the agricultural bonds were issued in the 1970s during
a chaotic land redistribution program started by leftist
dictator Gen. Juan Velasco, who sought to take farms from the
rich and hand them over to peasants.

Many middle-class planters were also ensnared in the
program, which caused Peru's agricultural output to collapse as
5,000 farms were seized between 1969 and 1981.

Agricultural output plummeted following the redistribution,
which took farms from aristocrats and middle-class planters
alike and handed them over to workers and the poor.

Hundreds of court cases have been filed over the years to
demand payment and a small number of them have been ruled in
favor of bondholders who sued the agriculture ministry. Other
cases could be tied up in courts for years.

But the vast majority of bondholders have never bothered to
file claims. Some have sold their bonds at deep discounts in an
informal secondary market. Internet sites in Peru post
advertisements to sell the bonds.

Creditors include groups representing thousands of families
who lost their farms, Peru's biggest bank, Banco de Credito del
Peru (CRE.LM), and the investment fund Gramercy.

Although Peru has won investment-grade credit ratings over
the last couple of years as its economy has boomed, it is still
haunted by four fiscal skeletons: the land bonds, a retirement
fund for the military, a similar fund for fisherman and a
government-run housing program that went bust. That housing
fund, known as Fonavi, is in the process of being paid.

Merino said that if Humala - who has named market-friendly
technocrats to key economic policy posts - were to pay the
bonds, it could calm investors worried about the strength of
Peru's institutions. [ID:nRISKPE]

"I believe they could send a national and international
signal that compliance with the mandates of the courts is a
moral, legal and constitutional aim of this government," she
said.

To avert pressure on the budget, creditors say the
government should carry out a swap that would allow owners of
the land bonds to exchange their illiquid paper for new
sovereign bonds with long-dated maturities. A swap would
marginally add to the country's debt burden.

Creditors say the country's tax agency is best equipped to
carry out the swap and verify the authenticity of old bonds
people own.

Some creditors have proposed donating 10 percent of the
payments to a foundation that would give out college
scholarships to poor kids and finance development projects in
rural Peru.

Asked whether he would pay the land bonds, Finance Minister
Luis Miguel Castilla said in February: "I don't think this is at
the top of the agenda at this moment but Peru must honor all of
its liabilities."

Merino said paying the land bonds might provide a
counterpoint to concerns over a giant project in the country
called Conga.

The country's business community has grown worried that
community opposition to mining could sink U.S.-based Newmont
Mining's (NEM.N) $4.8 billion Conga gold project.

"I think the country has developed a Conga-centric
personality in the last few weeks, as if everything were linked
to a single project, and that isn't so. Dozens of projects
advance with stability, harmony and success."

Conga is the biggest project ever proposed in Peruvian
mining history.

"I don't think it sends a good international message to say
the fate of a country depends only on a single issue (like
Conga)," she said.

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